Preferring higher share prices and with little pressure from
investors, firms eschew the move
By Erik Holm and Ben Eisen
Big companies are giving up on the stock split.
On Thursday, shares of Amazon.com Inc. almost brushed $1,000
before closing at $993.38.
The price increase, up from around $68 a decade ago, reflects
the company's growth and dominance. But it also marks the latest
example of a company letting its stock price rise without engaging
in a "split" that boosts the number of shares in order to lower the
per-share price. Google parent Alphabet Inc.'s Class A shares also
are now close to $1,000.
Other companies are aspiring to such heights. So far this year,
only two S&P 500 companies have split their stock. In all of
last year, six companies in the large-company index did. That's
down sharply from 20 years ago, when 93 S&P 500 firms split
their shares, a rate of close to two per week, according to Birinyi
Associates.
After decades of mostly remaining in a range between $25 and
$50, the average stock in the S&P 500 is now trading above $98,
the highest ever, according to Birinyi Associates.
A big stock price is "a new way of calling attention to
yourself," said William C. Weld, a finance professor at the
University of North Carolina's Kenan-Flagler Business School who
has studied stock splits. It used to be that splitting shares
signaled reliability and stability, he said. "Companies now are
saying 'look at us, we're tough and strong.' "
In the 1990s, when stock picking for one's own account was in
vogue, companies also considered splits a way to keep shares
affordable for mom-and-pop investors. Even though nothing changes
fundamentally about the company with a stock split -- it's like
trading a dime for two nickels -- splits used to generate
excitement and, often, a short-term pop for the shares.
In recent years, though, individuals have gravitated toward
index funds. And institutional investors don't like stock splits,
because increasing the number of shares increases their trading
costs.
"If you split the stock, you are effectively providing a source
of income to the brokerage community," said Weston Hicks, the
longtime chief executive of insurer Alleghany Corp., which trades
at $588.15. "We're trying to appeal to the long-term investor, and
keeping a consistent scorecard is the way to do that."
The godfather of the no-split camp is Berkshire Hathaway Inc.
Chairman Warren Buffett. Berkshire's Class A shares are the
priciest U.S.-listed equities. At $247,850 a share, Berkshire is up
more than three-million percent since Mr. Buffett bought his first
slug of the stock in December 1962. He paid $7.50 a share for his
initial stake.
For years, Mr. Buffett said he didn't want to split the shares
because he didn't want to attract people who found such a move to
be a good reason for buying a stock.
"People who buy for non-value reasons are likely to sell for
non-value reasons," he said in a 1984 letter to shareholders.
There are other reasons behind the trend. Before the rise of
discount brokerages and a decline in trading commissions in the
1990s, even small-time investors often had to buy shares in round
lots of 100, which meant that a high price could make such a
purchase prohibitively expensive. These days, though, retail
investors can buy as little as one share, and often pay commissions
of $10 or less.
Academics who have studied share splits have also posited that
executives who split their company's stock may be motivated by a
desire to keep their share prices from looking expensive. Now, some
companies and their investors seem to treat higher stock prices as
a sign of accomplishment, a phenomenon that economist Richard
Thaler from the University of Chicago Booth School of Business
calls "equally nonsensical."
"But at least Amazon can say 'well, the market sent us all the
way up here,' " said Mr. Thaler, who co-wrote an academic paper on
stock splits with UNC's Mr. Weld in 2009.
For his part, Mr. Weld theorizes that companies may have held
off on splitting shares in recent years in response to the
financial crisis, when stock prices dropped sharply and some big
companies were humbled into performing reverse splits to raise
their share price to avoid being delisted.
Even the biggest critics of the share split say there are times
when it is appropriate, so long as it's about more than a cosmetic
lowering of the share price. Alphabet, then called Google,
effectively split its shares by creating a new class of stock in
2014. Apple Inc. did an unusual 7-for-1 split that same year, a
move that lowered the price of the shares to a level where the
company could be comfortably added to the price-weighted Dow Jones
Industrial Average in 2015. And even Berkshire Hathaway did a stock
split in 2010, when it divided its Class B shares 50-for-1
alongside its acquisition of railroad Burlington Northern Santa Fe
Corp. Those cheaper shares were used to buy out small BNSF
shareholders in the cash-and-stock deal.
Amazon founder and CEO Jeff Bezos hasn't ruled out the idea of a
split, which the firm did three times as a young public
company.
A shareholder at Amazon's annual meeting in Seattle on Tuesday
asked Mr. Bezos if he would consider splitting the company's shares
to give members of the middle class and younger people the chance
to afford the shares.
Mr. Bezos responded that it's something the company has
considered. "We don't have any plans to do this at this point, but
we'll continue to look at that," he said.
Ball Corp., a supplier of metal packaging and one of the two
S&P 500 companies that split its stock this year, did so in
tandem with a boost to its dividend. The dual move was designed to
send a signal to investors that it has strong cash flow, though the
firm believes the dividend increase is the more important part of
that transaction, according to Scott Morrison, the company's chief
financial officer. "The split in and of itself isn't really that
exciting," he said.
--Laura Stevens contributed to this article.
(END) Dow Jones Newswires
May 27, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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